World Economic Growth Forecast Down Once Again

The International Monetary Fund cut its forecast for world economic growth for a third time this year due to slowing emerging markets, the prolonged recession in the Eurozone and weaker forecasts for US economic growth in the second half of this year.

In an update to its World Economic Outlook, the IMF said on Tuesday that it now expects world economic output to expand by just 3.1% in 2013, down from its 3.3% estimate in April. In January, it was forecasting world economic growth of 3.5% this year.

This latest downward revision means the global economy will have failed to pick up the pace as the IMF expected over the past two years. The IMF still expects a decent acceleration in global growth in 2014 to 3.8%, but it remains to be seen if that forecast will be revised down in coming months.

Since its last global report in April, the IMF has cut its 2013 growth forecasts for the US to only 1.7% from 1.9% and China to 7.8% from 8.0%. And it now expects the Eurozone economy – still mired in its longest recession – to shrink by 0.6% this year, double the rate of contraction the IMF forecast in April.

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Recent data from China point to a slowdown in its huge manufacturing sector. And attempts by Chinese policymakers to control runaway real estate markets and avoid a credit bubble have unnerved investors in recent weeks and prompted private sector economists to cut their growth forecasts for China this year. I would argue, however, that the cut from 8.0% growth to 7.8% is not significant.

However, the knock-on effect of slower growth in China is already being felt in other commodity-rich emerging markets such as Brazil, South Africa and others. The IMF cut its forecast for Brazil to 2.5% from 3% and for South Africa to 2% from 2.8%.

Three major economies should buck the trend, however. Japan, basking in the early success of its recent massive new stimulus program, could see growth of 2% this year, up from a previous forecast of 1.6%. The IMF has also revised up its 2013 forecasts for the U.K. and Canada by 0.3% and 0.2%, respectively.

Recent business sentiment surveys in Europe have begun to suggest that the rate of economic decline in the Eurozone is slowing, but it remains to be seen if the continent will emerge from the ongoing recession by the end of this year or in 2014.

The European Central Bank said last week it had a downward bias on interest rates and would maintain that stance “for an extended period,” given the challenge the region faces in balancing the goal of further reducing government borrowing, while at the same time using stimulus to bring down record levels of unemployment. That’s a difficult balancing act.

Germany, the region’s biggest economy, provided a stark reminder on Monday of the mountain Europe still has to climb. Germany’s exports to the Eurozone fell by 9.6% in May compared with the same month last year, and by 1.6% to countries outside Europe.

In a separate report on the Eurozone last week, the IMF warned that fragmented financial markets and the high cost of borrowing in peripheral nations was depressing activity across the region. It called on European leaders to do more to repair bank balance sheets, complete work on a new banking union, provide further support to the economy via easy monetary policy and show more flexibility on austerity while preserving medium-term debt reduction goals. That’s a lot to ask, especially as Eurozone voters are becoming increasingly restless and discontent.

The bottom line is, the IMF sees global growth slowing more later this year. That should not be a surprise to anyone. Perhaps that explains why President Obama has embarked on a nation-wide speaking tour promoting his economic policies.





Posted 07-30-2013 1:17 PM by Gary D. Halbert